How Tax Legislation Affects NYC Real Estate

The full House and the Senate Finance Committee each passed their version of tax reform legislation. The entire Senate plans to up the measure in the coming days. Should it pass, the two bills will get reconciled before being sent to President Trump’s desk for his signature.

While the bill is moving through the process very quickly, it is difficult to predict how this might affect New York City’s real estate. Our focus is to outline the main elements in the proposed legislation that could impact New Yorkers, with the understanding that things could change as negotiations take place to secure senators’ support, given Republicans’ narrow 52-48 majority in the chamber.

SALT

The elimination of the state and local income tax deduction (SALT) has received much attention. This affects those that itemize rather than take the standard deductions.

It is unclear if people migrate to states with lower income taxes since New York offers many economic and cultural opportunities. If people leave, there are long-term effects, such as reducing the tax base and affecting funding for items such as schools. This can have a circular impact, causing more people to exit. Still, at the very least, it makes New York City more expensive since residents’ tax bills will no longer be effectively lowered.

Both the House and Senate versions eliminate the SALT, but the House bill preserves the property tax deduction, only up to $10,000. The Senate version that passed the committee vote does not allow the deduction of property taxes.

Mortgage interest

The proposed bill lowers the amount you can deduct for mortgage interest. If you purchase a home, you can deduct interest on a mortgage up to $500,000. This is down from the current $1 million.

Since the average price for New York City homes reached $1.05 million in the second quarter, according to data from the REBNY, it is relatively easy to take out a $500,000 mortgage. The mortgage will be over $800,000 if a buyer puts down 20% based on this price.

Limiting the amount you can deduct for mortgage interest essentially makes borrowing more expensive for buyers in major cities such as New York. This could limit the pool of buyers, hurting demand and housing prices over the long term.

Individual’s bottom line

The tax benefits of homeownership may diminish should the tax legislation pass, making the cost-effectively higher. Financially, the decision to purchase a home remains weighing the costs/benefits of homeownership versus renting.

Investors

Pass-through entities, such as LLCs will see preferential tax treatment under both bills. Under the existing tax law, LLCs are taxed at the same rate as your income, which tops 39.6%. Under the House bill, the maximum tax rate is 25%. It is more complicated in the Senate’s contemplated version, which would allow a deduction of a certain percentage of income without a preferential rate.

An LLC would retain the ability to deduct mortgage interest and property tax. For real estate investors, this could prove beneficial. You come out ahead under the House plan if your tax rate is higher than 25%, while all LLCs benefit under the Senate version.

Who to watch?

With a slim majority in the Senate, three Republicans can decide the bill’s fate. Ron Johnson has come out against the bill. Assuming he stays in the no column, Republicans can afford to lose more than two votes.

It is unclear how these senators will vote, but these are individuals people are watching. A key vote against the Republican health care bill, Senator Murkowski stated she could support the chamber’s mandate repeal. Senator McCain, who also voted against the health care bill, stated he supported the process this time, a key reason he was against the health care bill.

Senator Collins of Maine has stated she wants to see changes, and Senators Bob Corker and Jeff Flake, neither of whom are running for re-election, are deficit hawks and could vote against the bill on that basis.